Constraints and Opportunities for PPP Transport Projects

by
Aurelio Menendez, Ph.D.
Lahmeyer International GmbH

1. Worldwide Trends for Infrastructure Investment

The World Bank estimates that in developing countries the annual demand for infrastructure (roads,
rail transport, urban transport, ports, water, sanitation, telecommunications, and energy) exceeds US$1
trillion, including about US$250 billion for new and rehabilitation investments. According to World
Bank sources, private sector participation has multiplied by about ten between 1990 and 1996, with
particular focus on power and telecommunication infrastructure (about 70% of the total investment
between 1990 and 1996). However, private capital flows provide less than 15% of the estimated
demand (Ref. 2), and then only a relatively small number of middle-income countries (mainly,
Argentina, Brazil, Mexico and Malaysia) plus China and India are the recipients of those flows.
About 140 of 166 developing countries (that is, almost 85% of them) attract only 5% of the flows. Of
the international flows for transport investment in developing countries, about 75% came from official
development agencies while 25% came from private sources.

Even for developed countries, the percentage provided by the private sector remains a minority. In
1996, in the US, that percentage amounted to about 47%, in the Netherlands, 46%, in Japan, 14%, in
France, 13% and in Germany, about 9%. The private involvement is also often concentrated in power
and telecommunications, and to a lesser extent in the air, port, and rail transport sub-sectors. Urban
and transport infrastructure continues to benefit little from private sector involvement. In the road
sector, the emphasis has been on commercialization of (operating) agencies with or without private
participation, but less limited on attracting private capital funding.

Table 1 shows the distribution of potential private infrastructure projects and of the actual investments
by region for the year 1996. The table highlights the substantial gap that needs to be covered to meet
the potential worldwide needs for investments in infrastructure. Leaving aside the most extreme figure
for the former Soviet Union, the ratio of potential to actual investments is about 2.5, reflecting a gap
that can only be met if resources can be tapped from private funds and additional charges are collected
from transport users. In all, the overall picture is one where the current financial resources are not
sufficient and a combination of approaches must be explored and implemented in order to try to
reduce the above-mentioned gap.

T ab le 1 . P o ten tial v s. A ctu al In v estm en t in P riv ate In frastru ctu re P ro jects b y R eg io n , 1 9 9 6

P o te n tia l n u m b e r E stim ate d c o st A lre a d y fin a n c e d P o te n tial/

R e g io n o f p ro je c ts (U S $ b illio n ) (U S $ b illio n ) A c tu a l
E a st A sia /P a c ific 709 5 3 4 ,7 1 8 5 ,6 2 ,9
O E C D E u ro p e 320 1 6 5 ,4 1 5 6 ,6 1 ,1
L a tin A m e ric a 409 9 1 ,5 5 8 ,5 1 ,6
U S A /C a n a d a 229 4 4 ,7 3 1 ,1 1 ,4
S o u th A sia 335 1 4 6 ,5 6 ,3 2 3 ,3
M id d le E a st/N o rth A fric a 67 2 3 ,3 4 ,7 5 ,0
C & E E u ro p e 70 6 2 ,8 3 ,5 1 7 ,9
F o rm e r S o v ie t U n io n 94 1 3 7 ,2 2 ,6 5 3 ,8
A fric a 78 8 ,0 1 ,2 6 ,7
T o ta l 2 .3 1 1 1 .2 1 4 ,1 4 5 0 ,1 2 ,7
S o u rc e: W o rld B a n k P riv a te In fra stru c tu re D a ta b a se a n d F IA S , W o rld B a n k G ro u p
As quoted in Ref. 3, page 18.

In the context of transport projects, this paper summarizes the key obstacles to the expansion of PPP
initiatives and highlights the structuring principles that, if taken into account, can help better define

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Seminar ‘Public Transport: Private Sector Solutions for Investment and Services’/ November 5-6, 1998
and develop those initiatives. On this basis, the paper delineates the actions of a proposed revision of
the prevalent approach to the development and implementation of transport projects and presents the
elements of an alternative model.

2. General Institutional Issues

The steady growth of private sector participation in infrastructure since the eighties appears to show a
process during which a novel approach needed some time to take roots and a substantial amount of
learning experience had to develop for new initiatives to unfold. Progress, however, has been limited
due to the frequent political reluctance (often originated in public opinion) to give up control of
infrastructure assets which had been in public hands for a long period of time. This reluctance, in
addition, has been compounded by the existence of other institutional factors, chief among them (a)
the absence of a matured regulatory framework, to prevent the appearance of monopoly situations and
sharp increases in tariffs or reductions in the level of service (which can lead to a political backlash),
and (b) an unstable sector policy environment coupled with unclear path to recourse if problems ever
arose.

These factors have often led to protracted tendering and negotiation processes, which have
undermined the credibility of some PPP initiatives. Overall, they have raised the policy risks and
widen the mismatch between the degrees of project risks as perceived by the public and private
sectors. A report prepared for the World Bank for East Asia (Ref. 10) highlights this mismatch as the
basic reason for protracted negotiations and frustrations between public and private partners.
Governments tend to perceive much lower risks than do sponsors and lenders in the private sector,
leading to terms-of-reference (and contracts) and a regulatory and policy framework not conducive to
the expansion of PPP initiatives. The lack of clarity about government’s objectives and commitments
often adds those factors. In all, the conditions set for private participation are often too cumbersome
to comply with, require a complex decision-making process, and imply a high level of risk.

Nonetheless, even within a stable general macro-economic (and political) environment, two factors are
effectively necessary for a project to have a chance of succeeding: (a) a strong government
commitment which can counteract any possible institutional or vested-interest resistance; and (b) a
sound financial basis with, if the project requires government support (in the form of subsidies or
guarantees), a proven economic worthiness. A PPP initiative cannot turn a weak project—in terms of
political commitment or financial/economic robustness—into a strong project.

3. Structuring PPP Transport Projects

A public-private partnership (PPP) constitutes a sustained collaborative effort between the public
sector (government agencies) and private enterprises in which each partner shares in the design of a
project (e.g., a transport project), contributes a portion of the financial, managerial and technical
resources needed to design and execute that project, and partially shoulders the risks and obtains the
benefits that the project creates (Ref. 6). Managerial control normally rests with the private partner.
PPP initiatives are usually appropriate when: (a) the public sector wishes to maintain a degree of
control over certain assets; (b) the public sector must contribute with resources or guarantees to make
the project ‘bankable’; (c) the implementation and timing of future project investments is uncertain
(for instance, due to undetermined commercial prospects); and (d) a publicly owned, commercially-
oriented entity wishes to participate in the project for commercial reasons (Ref. 5, page 23).

In the case of transport infrastructure, due to its public nature, projects must often comply with
regulations established by public authorities in order to address environmental, safety and, sometimes,
social considerations. Then, the public sector must become involved because a purely privately-
funded project would tend to maximize revenues to a level below the optimal dictated by the
maximization of economic development. A tradeoff is then often present in the case of transport

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Seminar ‘Public Transport: Private Sector Solutions for Investment and Services’/ November 5-6, 1998
projects when the financial rate of return is below the market rate for private funds, and some form of
public support is required to make the project feasible. The financial rate of return may be improved
by way of additional user charges but then the economic rate of return may be affected negatively and
a compromise would have to be found. (A case in point is shown in Box 1, where the decision not to
reduce the economic benefits of the project encouraged the selection of a toll that seeks to balance
economic and financial returns.)

Box 1. Colombia Road Tolls: Balancing political acceptability, economic benefits and financial returns
A major toll road project in Colombia—the Tobiagrande-Puerto Salgar Project—was put out to concession in
conjunction with existing road segments for which tolls already existed. To eliminate political pressures on the
setting of toll rates, these rates were specified in the concession contract (with a price escalation clause to
account for inflation). How much higher the tolls rates on the new road had to be set in comparison with
prevalent toll rates in the rest of the network was established by the Government on the basis of two major
factors: (a) the expected benefits to the various users—car, buses, and trucks of different sizes—from shorter
travel times and distances and better road conditions; and (b) the need to balance economic benefits and
financial returns. For the former factor, the first figure below shows the percentage tolls were estimated to
represent compared to the expected users’ benefits. For the latter, the second figure shows the variation of
economic rate of return and revenues in relation to toll rates. The values were provided in the bidding
documents, and the concession given to the bidder that required as key evaluation criterion the lowest
government contribution to the initial capital cost of the project. (Other criteria referred to various types of
Government guarantees.) (Ref. 12)

T o l ls a s P e rc e n ta g e o f U se rs' B e n e fits

40%
35%
30%
Percentages

25%
20%
15%
10%
5%
0%
Medium
Light truck
Car

Heavy

Articulated
Bus

truck
truck

truck

V a ri ta ti o n o f Ec o n o m i c R a te o f R e tu rn a n d R e v e n u e s
(i n Ye a r 2 0 1 0 ) w i th A v e ra g e T o l l o n N e w H i g h w a y

2 5 ,0 % 4 0 ,0 0
3 5 ,0 0
Economic Rate of Return

Revenues in Year 2010

2 0 ,0 %
3 0 ,0 0
(Col$ billion)

1 5 ,0 % 2 5 ,0 0
2 0 ,0 0
1 0 ,0 % 1 5 ,0 0
1 0 ,0 0
5 ,0 %
5 ,0 0
0 ,0 % 0 ,0 0
20%

40%

60%

80%
0%
-100%

-80%

-60%

-40%

-20%

P e r c e n t V a r ia t io n f r o m Es t a b lis h e d T o ll

Transport is a service which if under-provided may adversely affect certain sectors of the society and
prevent economic development. Furthermore, transport projects often require lump investments and,
once implemented, represent large sunk costs. That is why, transport infrastructure cannot often be

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Seminar ‘Public Transport: Private Sector Solutions for Investment and Services’/ November 5-6, 1998
seen as a simple private good. In the design and development of a transport project, three main
stakeholders are involved: (a) transport users (who are part of the larger group of the society as a
whole and of the taxpayers); (b) the government (i.e., public sector); and (c) private sponsors or
providers (to which, other actors, like lenders, are related). Figure 3 shows the interactions among
these stakeholders. The Government makes possible the provision of a service to the users and
receives in exchange the political support of the society and taxes. The Government regulates the
actions of the sponsors and may provide capital and guarantees for the development and operation of
the transport infrastructure. In exchange, the sponsors comply with the contract and agreed
performance and assumed certain risks. And the sponsors provide the infrastructure to the users with a
given level of service and for it the users pay tolls or other charges. Finally, the sponsors receive loans
from lenders and pay them according to a debt service payment schedule. Two circles of opposite
directions are in action, and their respective elements must be properly compensated.

Figure 1. Stakeholders and Interactions

Promotion of Public G overnm ent

Infrastructure & Services
Perform ance
Com pliance with contract
Assum ed risks

Capital contribution
Taxes Guarantees
Political Regulations
Loan
financing
Lenders
Support

Taxpayers Level of Service

Debt service
Sponsors payments

Infrastructure
U sers Tolls/Charges

These interactions and the public nature of transport infrastructure must be kept into account the
process of structuring PPP projects, with the analysis, assessment and definition of the following key
considerations: (a) need, level and form of government support; (b) ultimate fiscal impact of project;
(c) distribution of benefits among those affected by, or have a stake in the project; (d) risks of the
estimated economic and financial benefits; and (e) performance indicators for the measurement of the
future achievement of objectives and the application of the proper corrective actions. These key
considerations are described in greater detailed in the following paragraphs.

• Need, level and form of government support. The balance between the economic feasibility and the
financial ‘bankability’ of a project would require some kind of support from the public entity. To
the extent that it is possible to specify the minimum parameters which must be complied by the
private sector (in terms of possible social obligations and quality of service), the contribution of the
public entity must be structured in a way of reducing interference with the construction,
maintenance and management of the transport infrastructure by the private entrepreneur. As a
public-private partnership, however, the private-public scheme should permit the sharing of both
the risks and the up-side potential of the investment (i.e., the possible extra surplus revenues).
These characteristics would favor an initial contribution from the government in the form of a grant
(with specified shares in the possible surpluses) or in the form of equity (with no management
power). The justification for this government contribution must be proved through the evaluation
of the economic worth of the project (and hence the added benefits to the society of the project).

• Ultimate fiscal impact of project investment. In addition, the structuring of the project should
include an analysis of the net fiscal impact of the project, taking into consideration all the
additional tax revenues which would accrue to the government as a consequence of carrying out the
project by the private sponsor. In this manner, a project which may require the government

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Seminar ‘Public Transport: Private Sector Solutions for Investment and Services’/ November 5-6, 1998
 participation may prove, in addition, an additional source of tax revenue from the additional
construction or corporate profits, or from the added contribution of the users (for instance, in terms
of added taxes from gasoline consumption or other fees) who would not travel if the infrastructure
is not constructed (latent demand).

• Distribution of benefits. Furthermore, taking into consideration all of the costs, benefits and cash
flows of the project, the benefits that accrue to each one of the stakeholders (government, users,
sponsors) can be calculated, for the purpose of estimating the distribution of the net benefits/costs.
For this exercise, it may also be possible to discern among groups of users (like, for a road, among
trucks, buses, or private automobiles) and assess the support the project would be expected to
receive from those various groups. If a group is particularly disadvantaged from the construction
of the transport infrastructure, resistance from that group will likely take place.

• Risks of economic and financial returnss. The calculation of the economic and financial feasibility
of the project to the extent possible should be undertaken using risk analysis techniques in order to
ascertain the likelihood that the project may not end up being feasible economically or financially.
(See Figure 2 for an schematic representation of this type of analysis.) This analysis requires the
estimation of the probabilistic variation of the main input values, which may be the subject of
disagreement, but a reasonable approximation can be made from past experiences and with the
consensus of a representative sample of stakeholders.

Figure 2. Schematic Representation of Risk Analysis

E c o n o m ic G r o w t h

Economic Rate of Return

Frequency Chart
.025 76
0 .0 0 0 .3 8 0 .7 5 1 .1 3 1 .5 0

T ra n s p o rt D e m a n d G e n e ra tio n .01 57

.01 38

0 .0 0 0 .3 0 0 .6 0 0 .9 0 1 .2 0
.006 1
C o n s t r u c t io n a n d M a i n t e n a n c e C o s t s

.000 0

9.0% 12.0 15.0 18.0 21.0

Certainty is 89.23% from 12.0% to +Infinity
0 .9 5 1 .1 4 1 .3 3 1 .5 1 1 .7 0

• Performance indicators. Finally, the structuring of the project should include the definition of a set
of performance indicators that can allow both the public and private sectors to monitor the
achievement of a mutually agreed set of objectives. This exercise should be undertaken following
what is called a ‘logical framework exercise,’ specifying the assumptions that underlie the
definition of the dated indicators and the means of verifications. By monitoring the achievement of
the objectives, the private and public sectors would establish a continuous dialogue and allow for a
justified adjustment to the initial investment and operational performance.

The outcome of those considerations should bring additional insights on how to improve the
interactions among the stakeholders in order to reduce the risks as perceived by each stakeholder (and
for the project as a whole), and subsequently spur the development of transport infrastructure at the
quality and quantity required by the users’ demand.

4. Constraints to the Expansion of PPP Projects

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Seminar ‘Public Transport: Private Sector Solutions for Investment and Services’/ November 5-6, 1998
In the development of PPP projects, four main types of constraints must often be overcome:

• Political and bureaucratic constraints, such as fragmented decision making due to the involvement
of multiple pubic agencies, the prevalent emphasis on administrative procedures (rather than on
strategies and results) that stem from the traditional, lengthy tendering process (normally split in
three or four phases, from planning to final operation). These constraints must be tackled with an
aim at (a) developing and establishing clear and sustainable rules and agreements among relevant
public authorities, between these authorities and the affected users, and between the authorities and
the private sector (in particular, regarding the level and form of government support, the level and
structure of users’ charges, and the basic design of the project), (b) incorporating a strategic
perspective to the development of infrastructure, and (c) reducing the length of the often protracted
infrastructure development process.

• Regulatory constraints, like the presence of fuzzy responsibilities among (independent) regulatory
agencies and ministerial units and of unclear regulatory procedures, and the lack of, or deficient,
framework for the resolution of disputes. These constraints must be overcome towards providing
transparent procedures to delineate the market-competition, tariff-setting, and any other legal issues
related to the regulation of the general framework for project construction and operation and any
revisions to those procedures.

• Financial constraints, which largely stem from public budgetary limits and hesitant users’ charges
policies. They must be addressed towards achieving a sound financial structure for all the project’s
phases and an appropriate blend of back-stopping conditions, equity contributions, or other risk-
reducing measures which can help achieve the economic objectives of specific projects (for the
society as a whole).

• Methodological constraints, which stem from the frequent limited knowledge of inter-relationships
between variables and which prevent the clear definition of performance indicators or the
estimation of values that are key to the economic and risk evaluation of transport projects.
Overcoming these constraints would allow to refine those elements that are part of the structuring
components described in section 3, such as: (a) the conditions under which the project may become
not feasible, (b) the likelihood that certain outcomes can actually take place (risk analysis), (c) the
value of environmental factors, and (d) the ability to define adequately the quality/level of service,
the means of verification of compliance with agreed performance indicators, and the specification
of remedial actions.

The first two constraints often derive into a tendency for (a) excessive control of private management
through over-regulation and (b) risk sharing arrangements which penalize the upside potential of the
private sector while incorporating simultaneously long-term (contingent) government guarantees
without adequate (budgetary) provisions. There is a need for increased flexibility with improved
transparency, appropriate legal framework (which allows for speedy and fair resolution of disputes),
and adequate procurement procedures (which, for instance, incorporate pre-qualification).

The financial constraints originate in the fact that transport investments are (a) often large and their
costs can be recovered only over long periods of time, and (b) largely sunk as the assets cannot be
used elsewhere except at a great cost. For this purpose, commercial risk sharing must be targeted to
the specific items which are highly uncertain and subject to tender (like minimum revenue support
limited to the ramp-up periods after construction, during which revenues are uncertain).

The fourth constraint stems from the limited knowledge usually present at project preparation about
the interrelationships between certain variables (like price and time elasticity of demand) or just the
methodologies to define the values of certain variables (like time, pollution or accidents). The

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Seminar ‘Public Transport: Private Sector Solutions for Investment and Services’/ November 5-6, 1998
methodological constraints prevent a more careful consideration of risk variables and clearly shielding
the responsibilities of government or sponsors over agreed performance targets.

In this last respect, PPP projects involve the government (normally, the owner of the infrastructure)
that delegates the use of the assets for a specified period of time to the private sponsor. In the presence
of incomplete, in the case of transport project, it is usually very difficult to write down a contract to
specify the detailed specifications the private sponsor should undertake in each contingent situation,
and it is also difficult for the government to monitor (and thus enforce) those detailed specifications.
As a result and due to information asymmetries, a ‘principal-agent’ problem arises, creating what are
called ‘agency costs’. These costs and the steps taken to mitigate them, like establishing costly
monitoring processes, can adversely affect the ultimate efficiency of the project.

5. Opportunities for the Expansion of PPP Transport Projects

While the provision of infrastructure cannot simply be left to market forces, the expansion of PPP
initiatives to attend the infrastructure requires the rethinking of the traditional approach for the project
and tendering cycle and the reform of bureaucratic attitudes prevalent in public authorities. Public
funds are often required to cement the gulf between political goals, users’ needs, and financial
viability. But the private sector participation cannot expand to the extent necessary without an
environment that rewards innovation and performance, eliminates political interference on
management or technical matters, and provides a sound and transparent legal basis for the resolution
of disputes.

Up to now, the traditional public-works approach of the public sector has been to seek the best
combination of technical value and price for each individual phase of the project cycle, separating the
design, construction, and operation processes in successive (normally, lengthy) tender procedures.
This reduces innovation and entrepreneurial risk capital and the possibilities for the private sector to
make an effective contribution, especially in terms of developing and implementing novel ideas and
cost-effective designs. That traditional approach often leads the private sector to seek substantial
guarantees from the public sector, which, then, by largely transferring back the risk to the public
sector, largely defeats one of the main purposes of a PPP initiative. In addition, the methodological
constraints and the principal-agent problems mentioned-above create inefficiencies which can only be
addressed through flexibility and trust. This requires the delineation of the legal procedures to protect
both the public and private sectors in the resolution of disputes (Ref. 9).

In addressing the constraints listed in section 4, opportunities can be created with a fundamental
revision to the way projects are normally identified, designed and implemented. This revision should
include the following actions:

• Reformulating the framework for entire process (from planning and design to operation), in such a
way that the private sponsor can incorporate from the outset the innovation to reduce costs and
risks. This framework would also include the possibility of identification of projects by the private
sector and the unambiguous definition of the steps to be followed under that possibility (see below
more discussion about this aspect).

• Developing (or strengthening) the procedural and legal aspects to support such a framework (or
reformulating the traditional legal framework), ranging from those laws that allow the acceptance
of initiatives generated by the private sector, to the establishment of the necessary due process and
arbitration mechanisms, in a manner that does not lengthen the entire process (from project concept
to operation) to avoid increasing uncertainty (and hence risks).

• Incorporating into the relevant authorities the personnel with the technical and negotiation skills
necessary to support that framework (which would encompass assessments—such as that of the

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Seminar ‘Public Transport: Private Sector Solutions for Investment and Services’/ November 5-6, 1998
 desirability of a project concept—which may require subjective judgment). These skills should
strengthen the deal-making capacity of those authorities and promote a basis for a strategic
orientation (rather than administrative-orientation) of infrastructure project development (which, in
turn, would more likely attract private risk capital).

• Addressing the methodological constraints. With strengthened methodological tools, it would be

easier to establish and define general (flexible) specifications—core requirements—for the
development of project concepts and allow the private sector to assume the innovation and risks
since the planning stage (or, at least, after the completion of the public information/participation
phase over project concepts). In addition, those tools would permit the estimation and pricing of
risks and the definition of performance indicators (in close relationship to interrelationships
between variables, such as tariffs and demand) better supporting the implementation of the
reformulated framework. In all, the aim is at establishing the technical methods that would allow
greater flexibility in the definition of project specifications (to encourage innovation) while not
compromising the greater objectivity and precision that is possible when specifications are
standardized.

• Redefining and revamping user charges’ policies, within the context of economic policies.
Transport projects often do not pass a minimum financial return because user charges are either too
low or non-existent. In particular, it has been shown that for the road sector if indirect (externality)
costs (congestion, pollution and accidents) are taken into account, road users are heavily subsidized
(Ref. 1). With explicit prices for those costs (and similar considerations for all transport modes),
benefits would accrue to the rest of the society in lower congestion and pollution and the provision
of infrastructure would be more efficient. In addition, these charges would also raise significant
revenues which would go towards the recovery of the capital costs of the network, adding to the
financial viability of public-private partnerships (by providing a more stable revenue source).

• Revising (or expanding) the financial options for the participation of the public sector in PPP
initiatives. As transport project often have an initial (ramp-up) period of high risk during which
demand builds up, the participation of the public sector is often necessary to make possible the
financial viability of a project and not compromise the initial debt charges. This participation
should take place in the form of time-delimited guarantees (say, for a minimum level of demand
during the ramp-up period) and with capital contributions with equity features (but subordinated,
not to increase debt service obligations). Once the project reaches an agreed threshold of
profitability the public equity stake would benefit from a pre-determined profit-sharing mechanism,
then ensuring that any upside revenue over and above the expected profitability (to be measured as
rate of return or another indicator which can be accounted for) is recouped in exchange for the
participation of the government (and is returned to the society as a whole). The public participation
however should be set in such a manner as to not interfere with project management (beyond the
compliance with agreed ‘core requirements’).

Other requirements to spur risk taking and innovation by the private sector can be identified by
looking at other industries where innovation is crucial. In these industries, one can observe that
innovation and development is achieved through specific non-competitive advantages, such as patent
policies (that limit competition in order to create incentives for innovation in the discovery of products
which may have wide public impacts) or, more generally, ex-post restricted competition (to encourage
investments in specific assets which only start generating profits after a gestation period). The general
philosophy behind these examples is that in the absence of all the assumptions for establishing a
Pareto-efficient competitive framework, a limited restriction of competition may be beneficial.

For instance, in the pharmaceutical industry the high risks associated with the development of a new
product (from the initial studies, research, application, and final production) are leveraged through the
provision of patents, which provide the developer of an innovative product the incentive to enjoy

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Seminar ‘Public Transport: Private Sector Solutions for Investment and Services’/ November 5-6, 1998
certain advantages in the production of that product. A parallel application of this concept to transport
projects would imply that governments provide some limited advantage to the private entrepreneur
that generates a project concept, designs it, and proves its economical, technical, and environmental
feasibility. This advantage would consist on having an implicit dominance in the tendering process for
a PPP concession as given by the superior knowledge of the project developed by the private
entrepreneur itself. The costs for the development of the idea would be assumed by the private
sponsor, but recovered by itself at the time of wining the concession or from the winning
concessionaire if different from the developer of the idea.

Such a system would work in the following manner: (a) a private consortium/sponsor identifies a
transport project which may be prove viable (from a financial standpoint or from a combination of
economic and financial considerations); (b) with the authorization of the government, the private
sponsor undertakes the necessary studies for the project, including technical, economic and financial
feasibility and environmental assessment; (c) upon completion of the project and the conceptual
design, the government announces the tendering process for the project, within the context of a purely
private or PPP scheme (depending on the financial strength of the project); (d) if the winning party is
the same that undertook the studies, it would absorb the incurred costs and, if the winning party is
another group, this group reimburses the private sponsor for the cost incurred in developing the idea
(like a payment for a patent). Only if the government impedes the tendering process, this government
would have to reimburse the private sponsor the cost of the studies. (See Figure 3 for schematic
representation of this model.)

Figure 3. Schematic Representation of Alternative Model

A greem ent (M oU )
betw een G ov’t and D ecision : F in ancial
P roject S pon sor P roject D esign , C lose
on S cop e of S tud y C on cess. M od el .
and C osts
P roject C oncep t & F E A S IB IL IT Y S T U D Y C O N C E S S IO N C O N S T R U C T IO N +
P roject S pon sor T E N D E R IN G O P E R A T IO N

P h ase 1 P h ase 2 P h ase 3 P h aase

se 4
F U N D S: F U N D S: F U N D S:
P re - fin ancing by P re - fin ancing by A ccord in g to
P roject S pon sor (??% ) P roject S pon sor (??% ) T erm s of C oncession
A p roject is and G ov’t (??% ) and G ov’t (??% ) C on tract
identified b y
a consortium
If th e p roject is
term inated costs of
the P roject S pon sor
are to b e p aid by the
G overnm ent

C osts to be rep aid by the

su ccessfu l concessionaire

This system requires developing (a) the procedures for the approval of private-sector-led concepts and
the contingent liability that goes implicit with the approval of the reimbursement mechanisms from the
government side, and (b) the safeguards for avoiding abuses (like a government approving the
development of a project concept with the intention of not proceeding with the tendering process and
then having to reimburse the private sponsor) and providing the necessary public due process. It
requires the development of rules for the acceptance of project concepts (or for structuring the
competition between project concepts) and for the subsequent contractual framework. It further
requires the establishment of procedures for the negotiation between the government and a private
sponsor on the acceptability of the possible public contribution to a privately-initiated project. The
tackling of the methodological constraints mentioned in section 4 should help address these
requirements.

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Seminar ‘Public Transport: Private Sector Solutions for Investment and Services’/ November 5-6, 1998
A development in the direction of this framework is the DBFO (Design-Build-Finance-Operate)
schemes undertaken, in particular, in the United Kingdom. Box 2 summarizes the implications of
DBFO projects. These initiatives do not include yet the incorporation of the private sector into the
identification stage and are often based on shadow tariffs (receiving payment from the Government on
the basis of the charges per unit of traffic quoted at tendering) which implies a constraint in linking
transport demand with performance and in the means of managing that demand. They represent
nevertheless an important step in the direction of transferring responsibilities and innovation to the
private sector, and in the development of methodologies for monitoring performance.

Box 2. Design Build Finance Operate Scheme

In summary, a DBFO initiative implies that: (a) the designers are the future operators, with quality and capacity
levels optimized in a thirty year perspective; (b) the designers are the builders and suppliers, bringing into the
planning process precise knowledge of state-of-the-art technology; (c) the builders/suppliers are the operators,
having an interest in keeping costs down and completion times short; (d) the builders/suppliers/ operators carry
out their own financial engineering which means inter alia keen attention to expenditure timing (for the capital
markets, comfort is increased by lending, not just to a project, but indirectly to the large companies which make
up the DBFO consortium; comfort is further increased by more reliable cost and revenue forecasts carried out
by the risk takers themselves, as well as cost control; (e) the DBFO actor has control over its budget, being
insulated from the vagaries of annual public budget reviews, benefiting from substantial time savings. (Ref. 6)

6. Conclusion

This paper has attempted to summarize the main issues surrounding the development of PPP initiatives
for transport projects, and has highlighted the necessary structuring principles to strengthen the
identification and analysis of that type of projects.

Successful transport projects normally require the role of governments. The question now is not
whether there is a role for government or whether the government should intervene, but what that role
should be and how best should the government intervene (and, further, how best should the
government be strengthened to attend the new possibilities). From this perspective, and analyzing the
interactions of the stakeholders and obstacles normally present in the participation of the private sector
to transport projects, this paper presents key principles and actions of a more flexible and strategic-
oriented framework for the expansion of PPP initiatives (in line with the investment needs estimated
for the years ahead) and an alternative model that is intended to face the obstacles. These principles
should help re-orient the project development framework and tap the increasing breadth of experience
and proved efficiency of the private sector in designing, managing and operating transport
infrastructure investments and assets. Those principles should spur innovation and reduce and balance
risks.

The history of PPP initiatives shows an evolutionary process with successive learning taking place
with the experience gained in the implementation of alternative schemes and approaches, involving
methodological issues, risk sharing, procurement methods, interrelationships between the public and
private sectors, design of the regulatory environment, and the like. In the coming years, as additional
opportunities are embraced, projects with more innovation, new mechanisms for monitoring and
enforcement, and better perception of each other’s strengths and comparative advantages, should spur
the partnership and trust between the public and private sectors and an expansion of PPP initiatives.

References

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Seminar ‘Public Transport: Private Sector Solutions for Investment and Services’/ November 5-6, 1998
(1) Commission of the European Communities, 1998, ‘Fair Payment for Infrastructure Use: A
phased approach to a common transport infrastructure charging framework in the EU, ‘ White
Paper (presented by the Commission), Brussels (22 July).

(2) Dailami, M. and Klein, M., 1998, ‘Government Support to Private Infrastructure Projects in
Emerging Markets,’ Policy Research Working Paper No. 1868, Private Sector Development
Department, The World Bank, Washington, DC (January).

(3) Department of the Environment, Transport and the Regions, 1998, ‘The Private Finance
Initiative: The First Four Design, Build, Finance and Operate Roads Contracts,’ Report by the
Comptroller and Auditor General, London, United Kingdom (28 January).

(4) Euro-Atlantic Conference on Public-Private Cooperation in Central and Eastern Europe, 1998,
‘Bridging Gaps in Financing Infrastructure. Issues Paper,’ conference organized on behalf of the
Netherlands Government by the Netherlands Ministry of Foreign Affairs, European Affaris
Department, The Hague, The Netherlands (31 March-1 April).

(5) European Bank for Reconstruction and Development, 1997, Transport Operations Policy, EBRD,
London, United Kingdom.

(6) Federal Trust, 1997, ‘Private Partnerships and Public Networks in Europe,’ Harry Cowie,
Rapporteur, A Federal Trust Report, London, United Kingdom.

(7) Highways Agency, 1996 (?), ‘DBFO - Value in roads: A case study on the first eight DBFO road
constracts and their development,’ Private Finance Panel Executive, London, United Kingdom.

(8) Joskow, P., 1998, ‘Regulatory Priorities for Reforming Infrastructure Sectors in Developing
Countries,’ prepared for the Annual Bank Conference on Development Economics, The World
Bank, Washington, DC (April 20-21).

(9) Klein, M., 1996, ‘Risk, Taxpayers, and the Role of Government in Project Finance,’ Policy
Research Working Paper No. 1688, Private Sector Development Department, The World Bank,
Washington, DC (December).

(10) Megyery, K. and Sader, F., 1996, ‘Facilitating Foreign Participation in Privatization,’ Foreign
Investment Advisory Service, a joint facility of the International Finance Corporation and the
World Bank, Occasional Paper 8, Washington, DC.

(11) RCG/Hagler Bailly, Inc., and Mitchel Standfield and Associated, 1995, ‘Barriers and Options to
Private Sector Participation in Key Infrastructure Sectors in East Asia,’ prepared for the World
Bank, Working Draft, Washington, DC (January 30).

(12) World Bank, 1998, ‘Project Appraisal Document on a Proposed Loan to Colombia for a Toll
Road Concession Project: Report No. 17986,’ Finance, Private Sector and Infrastructure, Country
Management Unit for Colombia, Ecuador and Venezuela, Latin America and the Caribbean
Regional Office, Washington, DC (June 11).

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Seminar ‘Public Transport: Private Sector Solutions for Investment and Services’/ November 5-6, 1998